DST Due Diligence – DST 1031 Exchange Review

When purchasing real estate, investors typically research key details about the property and transaction. The same level of analysis is essential when investing in a Delaware Statutory Trust (DST). Investors should evaluate all aspects of the transaction, including the property—its location, condition, and use; the tenant—their financial stability, corporate structure, and operational history; the lease—cash flow, inflation protection, and duration with renewal options; and the potential for capital appreciation once the DST is sold. This thorough evaluation is known as DST due diligence and is a critical step in selecting the best real estate investment or best passive real estate investment.

Definitions:

• Sponsor: The company/entity offering the DST to the public, often one of the leading real estate investment companies.
• Broker Dealer: A firm with advisors under its network that reviews 1031 exchange offerings.
• Advisors: Also referred to as registered representatives; they directly sell DST opportunities to the public.
• FINRA: The regulatory body for the financial industry that provides investor protection and oversight.
• 3rd Party Legal: An independent firm specializing in real estate and/or securities law, conducting due diligence on the Sponsor and DST.

Why Due Diligence Matters
Due diligence provides investors with details about the benefits, risks, and costs associated with a DST investment. This process is essential for 1031 exchange opportunities, especially when reviewing Available DSTs in the market. While it doesn’t guarantee investment success, it helps investors and advisors identify high yield real estate investmentsaligned with their goals.

Types of DST Due Diligence

• Sponsor Review: Real estate investment agencies and Broker Dealers assess the Sponsor’s financial strength, operational track record, and management team. They may also require a 3rd Party Legal review for added transparency.
• DST Offering Review: Before making a DST available to investors, Broker Dealers and third-party reviewers examine the Private Placement Memorandum (PPM) and supporting documents to ensure compliance and investment viability.

What DST Due Diligence Offers

• From the Sponsor: Detailed income, expense, and profit projections; property condition reports; tenant data; risk disclosures; and confirmation that the DST qualifies as a Delaware Statutory Trust 1031 replacement property.
• From the Broker Dealer: Interviews with the Sponsor, review of acquisition and financing strategies, and analysis of PPM documentation before making it available to advisors.
• From the 3rd Party Legal: Independent, in-depth analysis of both the Sponsor and DST, providing an opinion on whether the projections are realistic and aligned with industry standards.
• From the Lender: Assessment of the property’s ability to meet debt obligations and the Sponsor’s experience before loan approval—often a positive signal in real estate and development projects.
• From the Financial Advisor: A review of the investor’s unique needs, familiarity with the Sponsor’s track record, and knowledge of specific DST 1031 explained investment options.
• From the Investor: Conducting personal due diligence, choosing a qualified advisor, and evaluating 1031 exchange offerings that match their investment strategy.

Final Thoughts on DST Due Diligence
The due diligence process often involves significant costs for the Sponsor but provides valuable insights for the investor. With thorough analysis by the Sponsor, Broker Dealer, 3rd Party Legal, Lender, Advisor, and the investor themselves, DST due diligence ensures better decision-making when evaluating Available DSTs and high yield real estate investments.